Phase 3 PSAB Implementation Newfoundland and Labrador Municipalities

1
Phase 3 PSAB Implementation
Newfoundland and Labrador Municipalities

• Department of Municipal Affairs
• September to November 2009

2
Objectives of the Presentation

• Help you understand the differences between the
  old new F/S.
• Help you understand the requirements of the new
  F/S.

3
PSAB Reporting Model

• PSAB Public Sector Accounting Board
• It regulates accounting principles and practices
  for the public sector.
• Prior to 2009, PSAB had separate standards for
  municipalities using a modified cash basis of
  accounting.
• Beginning January 1, 2009 all governments will
  use the same financial reporting model which
  utilizes accrual accounting.

4
PSAB Reporting Model

• The move to PSAB by municipalities should be seen
  as an evolving trend to
• provide greater disclosure of financial
  information,
• meet the needs of a wider range of users, and
• facilitate better decision making by users.
• PSAB Reporting provides a more comprehensive set
  of financial statements that places equal
  emphasis between the annual surplus/deficit and
  the overall financial health of the municipality.

5
Urgency for PSAB compliance

• The 2009 financial statements will require
  comparative figures for 2008.
• This means
• Municipalities should have started gathering
  information that they needed for their 2009
  financial statements in 2008.

6
If Municipality is Non Compliant

• Municipal auditor must qualify his/her audit
  opinion.
• Could affect financing costs with banks.
• Could create public concern over Councils
  management practices.
• Would affect a Municipalitys receipt and
  eligibility for Federal and/or Provincial
  programs, such as the Gas Tax Funding Agreement.

7
Three Phases of the Departments Action Plan

• Phase 1 - January to September 2008
• Established a Steering and Working Committee
• Created the TCA Reference Manual
• Conducted Training Sessions
• Phase 2 - September to December 2008
• Launched the PSAB resource website
• Created the TCA Valuation Manual
• Created the Phase Two Reference Manual  
  -Municipal Reporting Entities, Consolidations  
  -Accruals, Environment Liabilities, etc.
• Conducted Training Sessions

8
Three Phases of the Departments Action Plan
continued

• Phase Three - September to November 2009
• Created a Phase Three Reference Manual  
  -Financial Statement Presentation
  Disclosures   -Financial Planning (Budgets)
  Reconciliation
• Modified and updated the PSAB resource website
• Currently offering Phase Three Training Sessions.
  

Now, were here
9
PSAB Reporting Model

• Municipalities in many of the other provinces are
• already complying with PSAB. This would include
  the
• provinces of
• B.C.,
• Alberta,
• Saskatchewan,
• Ontario, and
• Nova Scotia.

10
PSAB Reporting Model

• There are four statements required by PSAB
• Statement of Financial Position ( Balance Sheet)
• Statement of Operations ( Income Statement)
• Statement of Change in Net Debt
• Statement of Cash Flow

11
There are five major changes in the new PSAB
financial statements

• TCA/Amortization
• Accrual Accounting
• Debt Payments
• Reporting Entity
• Transfers

12
Major Changes in the Financial Statements1.
TCA/Amortization

• Old F/S
• Capital Expenditures are directly expensed.
• 100 of cost is expenditure of accounting period.

• PSAB F/S
• Capital payments are recorded as TCAs.
• Cost of a TCA is amortized over its useful life.
• Cost is spread over more then one period.

13
Major Changes in the Financial Statements1.
TCA/Amortization - Example

• Old F/S
• New Computer Network 40,000
• Expense entire 40,000

• PSAB F/S
• New Computer Network 40,000
• Record as TCA
• Determine Useful life - 4 yrs
• Amortization -10,000/yr which is a Noncash
  expense

14
Major Changes in the Financial Statements2.
Accruals

• Old F/S
• Prepared on a modified cash basis.
• Expenditures were recorded when cash was
  disbursed.

• PSAB F/S
• Prepared on a full accrual basis.
• Expenses are recorded as incurred.
• Examples accrued salaries, accounts payable,
  environmental liabilities

15
Major Changes in the Financial Statements2.
Accruals - Example

• Old F/S
• Mr. X earns 2 wks severance pay (2,000)/year of
  service
• He retires after 20 yrs
• 40,000 is expensed in his year of retirement

• PSAB F/S
• Mr. X earns 2 wks severance pay (2,000)/year of
  service
• 2,000 is accrued each year
• 40,000 liability paid in year of retirement

16
Major Changes in the Financial Statements3.
Debt Payments

• Old F/S
• Debt service charges included interest
  principal payments
• This total was expensed.

• PSAB F/S
• Debt service charges only include interest
• Principal payments reduce the liability.

17
Major Changes in the Financial Statements4.
Reporting Entity

• Old F/S
• F/S only report on the activities of the
  municipality.
• Each fund is presented separately in the F/S.
• General Operating Fund
• Reserves
• General Capital Fund

• PSAB F/S
• F/S include all organizations that are controlled
  by the municipality.
• All controlled organizations and government
  partnerships are consolidated into one set of
  summary F/S.
• Consolidated statements are only required for the
  year end audited financial statements.

18
Major Changes in the Financial Statements4.
Reporting Entity continued
A quick refresherwhat do we mean by control..
CONTROL
Primary Indicators
Secondary Indicators
19
Major Changes in the Financial Statements4.
Reporting Entity continued.
What are the PRIMARY indicators of control

• Having the power to govern
• Power to unilaterally appoint or remove majority
  of governing members.

• Have the authority to determine financial
  operating policies
• Does not necessarily mean day-to-day management

• Expected benefits or risk of loss
• Benefits may be financial or non-financial
• Most benefits are service oriented
• Does risk of loss accrue to the government?

20
Major Changes in the Financial Statements4.
Reporting Entity continued.
PRIMARY indicators of control..

• Hold a majority of the voting shares
• Municipal governments dont often have voting
  shares

• Unilateral power to dissolve the organization
• Access assets
• Become responsible for its obligations

If any one (1) of these indicators exists, the
organization is likely controlled and should be
consolidated and included in the MRE!
21
Major Changes in the Financial Statements4.
Reporting Entity continued.
What about the SECONDARY indicators of control

• Significant input into the appointment of a
  governing body.
• Can appoint or remove key personnel of the
  organization.
• Establish or amend an organizations mandate or
  mission.
• Can establish borrowing or investment limits.

22
Major Changes in the Financial Statements4.
Reporting Entity continued.
SECONDARY indicators of control, contd

• Are able to restrict revenue generating capacity.
• Can establish or amend organizational policies.
• Can approve and make changes to the
  organizations budget.
• Remember to consider the indicators collectively.
• The more indicators that exist, the more likely
  control
• exists!

23
Major Changes in the Financial Statements4.
Reporting Entity continued.

• Still not sure?
• See the Municipal (Consolidated) Reporting Entity
  Checklist in the Phase 2 Reference Manual or
  online at the PSAB website.

24
Major Changes in the Financial Statements4.
Reporting Entity continued
Controlled Entities

• Core Government
• General Op Fund
• General Op Reserve
• Capital Fund
• Etc.

Government Partnerships
Everything within the red circle is part of the
Municipal Reporting Entity (MRE)!
25
Municipal Reporting Entity

• Identify controlled entities govt partnerships
  (GP)
• Ensure entity F/S will be available on time.

• Difficulties with entities will create problems
  for June 30, 2010 deadline
• Discuss with your auditor as to the level of
  assurance required for each entity. Depends on
  materiality.

26
Major Changes in the Financial Statements5.
Transfers

• Old F/S
• Inter-fund and inter-organizational balances and
  transactions were recorded.

• PSAB F/S
• Transfers to reserves are not expenses and
  transfers from reserves are not revenues.
• Inter-fund and inter-organizational balances and
  transactions are eliminated.

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Budgeting

• The landscape has remained the same, but the
  picture is being taken from a different
  perspective
• Daryl Wilson
  Chair of PSAB
• February 10, 2003

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Budgeting

• The budget process will not change for
  municipalities.
• Still budgeting on a cash basis as in previous
  years.
• Municipalities are still required to prepare a
  balanced budget in accordance with the
  Municipalities Act or applicable Citys Act.
• A reconciliation between the financial plan and
  the PSAB budget will have to be disclosed in the
  notes and/or schedules to the financial
  statements because of the budget disconnect.

29
Budgeting

• What is the Budget Disconnect?
• A Budget Disconnect is the difference between
  what is budgeted on a cash basis and the
  operating results reported under PSAB.

Surplus/Deficit Reported Under PSAB
Budgeted Cash Surplus/Deficit
30
Budgeting

• A Budget disconnect results from the fact
• the financial plan is prepared on a cash basis
  while PSAB is prepared using accrual accounting,
• under PSAB, transfers are neither revenues nor
  expenses,
• PSAB only records the interest portion of debt
  repayments as an expense. The current budget
  records the entire debt repayment as an
  expenditure,
• the financial plan expenses the entire amount of
  a capital transaction in an accounting period.
  PSAB capitalizes and amortizes this same expense
  over a number of years.

31
Standards of Financial Statement Presentation

• Financial Statement Objectives (4)
• Qualitative Characteristics of Financial
  Statements(4)
• General Reporting Principles (10)

32
Financial Statement Objectives

• Financial Statements should include all the
  organizations the government controls i.e. MRE
• Financial Statements should report the
  governments financial position.
• Financial Statements should report changes in the
  governments financial position.
• Financial Statements should demonstrate if
  resources were administered in accordance with
  the budget.

33
Qualitative Characteristics of Financial
Statements

• Relevance
• Reliability
• Comparability
• Understandability

34
Relevance

• Financial Statements are relevant when they help
  users
• make decisions and provide information that
• has predictive feedback value
• Predictive value of the Statement of Operations
  is enhanced if abnormal items are disclosed
  separately. Information that confirms or corrects
  previous predictions has feedback value.
• Example A municipality realizes a very large
  gain from the sale of a tangible capital asset.
  This would not be a normal recurring source of
  revenue so predictive value would be improved by
  disclosure of the abnormal item.

35
Relevance continued

• provides accountability
• Information that helps users assess a
  government's stewardship of the resources
  entrusted to it has accountability value.
• Enhanced when financial statements compare actual
  results against financial objectives and targets.
  
• Example - budgets
• and is timely.
• In order for information to be useful, the
  decision maker must receive the information
  before it loses the capacity to influence
  decisions.
• Example Financial statements issued long after
  the fiscal period they are reporting on.

36
Reliability

• Inaccurate, inappropriate or incomplete
  information, or
• information that is biased or does not faithfully
  represent what it
• purports to represent, will inhibit rather than
  enhance
• understanding and decision making by users.
  Reliable
• information has the following characteristics
• Representation Faithfulness
• Transactions s/b accounted for in a manner that
  conveys their substance rather than necessarily
  their legal form.
• Example Capital leases The legal title to a
  piece of equipment may remain with the lessor but
  the lessee has taken on all the risks and
  benefits of ownership. The lessee therefore
  accounts for the transaction exactly as if he had
  borrowed funds and purchased the equipment
  outright.

37
Reliability continued.

• Completeness
• Means providing sufficient information about
  transactions balances for a user to understand
  the governments finances.
• Example Notes to the F/S
• Neutrality
• Information should be free from bias, it should
  be neutral and report economic activity without
  coloring the image in some particular direction.

38
Reliability continued.

• Conservatism
• Used when estimates must be made in conditions of
  uncertainty.
• When uncertainty exists ensure that assets
  revenues are not overstated, or liabilities
  expenses are not understated.
• Verifiability
• A transaction is veridical if a knowledgeable and
  independent observer would concur that it is in
  agreement with the actual underlying transition
  with a reasonable degree of precision.
• Deals with the measurement of a transaction
  rather than its appropriateness

39
Qualitative Characteristic trade-off

• In practice there is often trade-offs between the
  
• qualitative characteristics.
• The aim is to achieve an appropriate balance
  between
• the characteristics but there is often a
  trade-off
• between relevance and reliability.
• Example
• Land is for sale but has to be valued at the
  lower of historical or net realizable value.
  Valuing the land at fair market value would be
  more relevant but historical cost
• would be more reliable.

40
Comparability

• Comparability between governments is enhanced
  when they follow the same accounting standards.
• Consistent application of accounting policies
  between accounting periods enhances
  comparability.

41
Understandability

• For information to be useful it must be
  understood by
• others. Understandability can be enhanced in
  financial
• Information by ensuring
• Information is presented clearly and simply.
• Avoid excessive detail complex presentation
  formats which often result in confusion errors.

42
Chart of Qualitative Characteristics
Understandability
Conservatism
Decision Usefulness
Verifiability
Predictive value
Neutrality
Reliability
Relevance
Timelines
Completeness
Accountability
Representational Faithfulness
Comparability
Consistency
43
General Reporting Principles

• Financial Statements should be clearly identified
  and are the responsibility of the government.
• Notes and Schedules that are integral to the
  Financial Statements should be clearly
  identified.
• Notes and supporting schedules should not be used
  as a substitute for proper accounting.
• Financial Statements should present the
  governments
• Financial position
• Results of operations
• Change in net debt
• Cash flows
• Financial Statements should use common
  terminology classification of items so the
  information is understandable.

44
General Reporting Principles continued.

• Financial Statements should include comparatives.
• Financial Statements should be issued on a timely
  basis.
• The valuation of assets liabilities should be
  applied consistently, and where it is not self
  evident, it should be disclosed.
• Where Financial Statements are subject to audit,
  the auditors report should be appended to the
  statements. Unaudited statements should be
  clearly identified.
• Financial Statements should present the substance
  of transactions events.

45
Statement of Financial Position ( Balance Sheet)

• Presents a year end snapshot and highlights the
  following key
• figures that describe the financial position of
  the government
• Financial assets (FA)
• Liabilities
• Net Debt or Net FA Position
• Non-Financial Assets (NFA)
• Accumulated Surplus

46
Key Figures in the Statement of Financial
Position1. Financial Assets (FA)

• Financial Assets are assets that can be used to
  pay existing
• liabilities or finance future operations and are
  not for
• consumption in the normal course of business.
  They represent
• the resources available to pay existing
  liabilities or finance future
• operations. Some examples
• Cash cash equivalents
• Temporary or short-term investments
• Amounts Receivable (within 1 year of F/S date)
• Inventories for sale

47
Key Figures in the Statement of Financial
Position 2. Liabilities

• Represent present obligations of a government to
• others arising from past transactions or events.
  Some
• examples
• Accounts payable accrued liabilities
• Trade payables
• Accrued salaries wages
• Accrued audit fees
• Accrued interest payable
• Deferred revenue
• Deposits for services goods which have not been
  delivered
• Prepaid taxes
• Tax levies in advance

48
Key Figures in the Statement of Financial
Position 2. Liabilities continued

• More examples which maybe of a more long-term
• nature
• Liability for the remediation mitigation of
  contaminated sites
• Obligations under capital leases
• Loans from other governments
• Borrowings
• Debentures
• Bank loans

49
Key Figures in the Statement of Financial
Position 2. Liabilities continued
Environmental Liabilities

• There are three criteria that must be met for an
  Environmental
• Liability to be reported, namely
• the contamination must exceed an environmental
  standard,
• the government must be directly responsible or
  accept responsibility for the site, and
• a reasonable estimate of the amount must be able
  to be made.

50
Environmental Liability Decision Tree
51
In general for Environmental Liabilities.

• Identify your existing potential contaminated
  sites.
• Value and record as of Jan 1/09 and/or Dec 31/09.

• Record liability if
• Contamination exceeds an environmental standard
• Muni is directly responsible or accepts
  responsibility and
• Reasonable estimate of the cost can be made.
• Otherwise disclose

52
Key Figures in the Statement of Financial
Position 3. Net Debt/Net FA

• A Governments Net Debt position is a key
  indicator of its overall financial health.
• Net Debt is simply a governments financial
  assets less its liabilities.
• If a governments financial assets are greater
  then its liabilities then it is called Net
  Financial Assets. If a governments financial
  assets are less then its liabilities then it is
  called Net Debt.
• A Net Debt balance represents a lien against
  future operations while a Net Financial Assets
  balance means the government has resources
  available for future.
• In general
• If financial assets are greater then liabilities
  Net Financial Assets
• If financial assets less then
  liabilities Net Debt

53
If a Municipality is in a net debt position does
that mean that its bankrupt?

• The answer isNO!!

• Not all the liabilities are due at the Financial
  Statement date.

• It simply means
• Net debt balance represents a
• lien against future operations.
• Net FA balance means the
• government has resources
• available for future operations.

54
Key Figures in the Statement of Financial
Position 4. Non Financial Assets

• Non-financial assets are assets that
• unlike financial assets do not normally provide
  resources to pay existing liabilities.
• are normally employed to deliver government
  services and
• unlike financial assets maybe consumed in the
  normal course of operations.
• Examples of Non-financial assets

• Prepaid expenses
• Inventories for consumption
• Culverts
• Chemicals
• Fuel
• TCAs!

55
Remember Tangible Capital Assets?
Have useful lives extending beyond an
accounting period

• Are held for use
• In production of goods and services
• For rental to others
• For administrative purposes
• For the development, construction, maintenance
  repair of other TCA

TCA
Are to be used on a continuing basis
Are not for sale in the ordinary course
of operations
55
56
Tangible Capital Asset (TCA) cont

• Tangible can be touchedsubstance
• Capital lasts over timesustainable
• Asset has measurable valueto the public or the
  municipality

56
57
Tangible Capital Asset (TCA) cont

• What info do you need to collect or look for?
• Description of each asset
• Asset category, or class
• Year of acquisition
• Expected useful life
• Significant improvements made since acquisition
• Estimated residual value, if any
• In theory, any asset that meets the definition of
  a TCA
• should be capitalized however you need to keep in
  mind
• capitalization thresholds!

57
58
Tangible Capital Asset (TCA) cont
The capitalization threshold defines the minimum
dollar level a municipality will use to determine
which expenditures will be capitalized and which
will be expensed.

• Items whose original cost or value is above the
  threshold are capitalized as assets.
• Items whose value is below the threshold are
  expensed.

Above threshold CAPITALIZED
threshold
Below threshold EXPENSED
58
59
Tangible Capital Asset (TCA) cont

• SO, whats the bottom line?
• The proper capitalization threshold is a balance
  between the
• accurate presentation of results, and
• the cost of acquiring maintaining the
  accounting records.

59
60
Tangible Capital Assets

• Should be completed as of Jan 1/09
• Most municipalities have completed their TCA

• Time is running out!
• Refer to the Tangible Capital Asset Valuation
  Manual and the Tangible Capital Assets Reference
  Manual.
• Critical that you complete ASAP

61
Key Figures in the Statement of Financial
Position 5. Accumulated Surplus

• The accumulated surplus is another key indicator
  of a municipalitys overall financial health.
• The accumulated surplus does not represent a
  pool of surplus cash. It represents
• a municipalitys net worth,
• the amount by which all assets exceed
  liabilities,
• the Net financial assets (or net debt)
  Non-Financial Assets,
• the net resources available to provide future
  services, and
• the sum of all annual surpluses and deficits
  since the municipality existed

62
TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE
CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at December 31, 2009 As at December 31, 2009 As at December 31, 2009 As at December 31, 2009 As at December 31, 2009 As at December 31, 2009 As at December 31, 2009          
2009 2008
FINANCIAL ASSETS FINANCIAL ASSETS FINANCIAL ASSETS FINANCIAL ASSETS FINANCIAL ASSETS FINANCIAL ASSETS
Cash and temporary investments Cash and temporary investments Cash and temporary investments Cash and temporary investments Cash and temporary investments Cash and temporary investments Cash and temporary investments Cash and temporary investments 1,497,300 1,547,100
Amounts receivable Amounts receivable Amounts receivable Amounts receivable Amounts receivable Amounts receivable Amounts receivable 410,600 307,950
Portfolio investments Portfolio investments Portfolio investments Portfolio investments Portfolio investments Portfolio investments 81,500 75,000
Real estate properties held for sale Real estate properties held for sale Real estate properties held for sale Real estate properties held for sale Real estate properties held for sale Real estate properties held for sale Real estate properties held for sale 147,300 137,000
2,136,700 2,067,050
LIABILITIES LIABILITIES LIABILITIES LIABILITIES LIABILITIES LIABILITIES
Accounts payable and accrued liabilities Accounts payable and accrued liabilities Accounts payable and accrued liabilities Accounts payable and accrued liabilities Accounts payable and accrued liabilities Accounts payable and accrued liabilities Accounts payable and accrued liabilities Accounts payable and accrued liabilities 1,111,300 1,136,100
Deferred revenue Deferred revenue Deferred revenue Deferred revenue Deferred revenue Deferred revenue Deferred revenue Deferred revenue 15,000 30,000
Landfill closure and post closure liabilities Landfill closure and post closure liabilities Landfill closure and post closure liabilities Landfill closure and post closure liabilities Landfill closure and post closure liabilities Landfill closure and post closure liabilities Landfill closure and post closure liabilities Landfill closure and post closure liabilities 26,000 20,650
Long-term debt Long-term debt Long-term debt Long-term debt Long-term debt Long-term debt Long-term debt Long-term debt 152,500 140,220
1,304,800 1,326,970
NET FINANCIAL ASSETS NET FINANCIAL ASSETS NET FINANCIAL ASSETS NET FINANCIAL ASSETS NET FINANCIAL ASSETS NET FINANCIAL ASSETS NET FINANCIAL ASSETS NET FINANCIAL ASSETS 831,900 740,080
NON-FINANCIAL ASSETS NON-FINANCIAL ASSETS NON-FINANCIAL ASSETS NON-FINANCIAL ASSETS NON-FINANCIAL ASSETS NON-FINANCIAL ASSETS NON-FINANCIAL ASSETS
Tangible capital assets Tangible capital assets Tangible capital assets Tangible capital assets Tangible capital assets Tangible capital assets Tangible capital assets Tangible capital assets 742,500 516,000
Inventories Inventories Inventories Inventories Inventories Inventories 10,000 20,000
Prepaid expenses Prepaid expenses Prepaid expenses Prepaid expenses Prepaid expenses Prepaid expenses 37,200 31,200
789,700 567,200
ACCUMULATED SURPLUS ACCUMULATED SURPLUS ACCUMULATED SURPLUS ACCUMULATED SURPLUS ACCUMULATED SURPLUS ACCUMULATED SURPLUS ACCUMULATED SURPLUS 1,621,600 1,307,280

A
B
A-B
C
A B C
63
Statement of Operations (Income Statement)

• The Statement of Operations displays the cost of
• government services provided in the accounting
  period, the
• revenues recognized in the accounting period and
  the
• difference between them. It highlights
• the sources of revenues,
• the types of expenses,
• the annual surplus/deficit (difference between 1
  2) and
• the change in the accumulated surplus at the
  beginning and end of the period.

64
Statement of Operations Revenues

• Revenues, including gains, are increases in
  economic
• resources. Some examples
• Taxation
• All municipal taxes including penalties
  interest
• i.e. Property taxes, business taxes, water and
  sewer taxes, etc.
• User Fees
• Parking meters, rentals, park fees

65
Statement of Operations Revenues continued

• Grants
• Gas Tax Agreement Revenue
• Municipal Operating Grants
• Multi Year Capital Works Programs
• Other provincial grants
• Permits, Licenses Fines
• Building permits
• Business licenses
• Animal control fines and fees
• Occupancy Permits

66
Statement of Operations Revenues continued

• Investment Income
• Interest earned
• Other Revenue
• Miscellaneous
• Rule of thumb - Should not exceed 10 of total
  revenue or more detailed disclosure required.
• Water Sewer
• All revenues from water and sewer operations

67
Statement of Operations ( Income Statement)
Expenses

• Expenses, including losses, are decreases in
  economic
• resources. Some examples
• General Government Services Expenses
• Expenses relating to the operation of Council and
  the Municipality.
• Includes any expenses that cannot be attributed
  to a particular program.
• Includes employee pensions and benefits and other
  general government expenses.

68
Statement of Operations Expenses continued

• Transportation Services Expenses
• Maintenance of roads, streets, sidewalks and
  bridges.
• Protective Expenses
• Provision of fire protection, traffic enforcement
  
• Recreation and Cultural Services
• Maintenance and operation of community centers,
  swimming pools, arenas, libraries, etc.

69
Statement of Operations Expenses continued

• Expenses are reported by function on the
  Statement of Operations.
• Expenses by object are normally disclosed in a
  schedule. Examples
• of expenses by object would be
• Utilities
• Lighting heating, phone, cable/internet
• Amortization
• Interest on Long term Debt
• Interest expense on loan and debentures

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Statement of Operations Expenses continued

• Bad debt Expense
• Expenses relating to doubtful amounts receivable.
• Maintenance Materials and Supplies
• cleaning supplies
• office supplies
• small tools
• automotive and equipment parts
• Other Operating Expenses
• Miscellaneous
• Rule of thumb - Should not exceed 10 of total
  expenses or more detailed disclosure is required.

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Accounting For HST Rebates

• HST Rebates are not Federal transfers!!! They
  are refunds of HST paid.
• HST rebates HST paid should not affect the
  Statement of Operations.
• Example
• Purchase new stationary on Jan 1/09
• Dr. Expense - GG 1,000
• Dr. AR- HST Refund (B/S) 50
• Cr. Bank 1,050

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Accounting For HST Rebates

• Assume this is the only transaction for 1st
  quarter of 2009. In
• the 2nd quarter you receive your HST refund and
  make the entry
• Dr. Bank 50
• Cr. AR- HST Refund 50
• For fiscal 2008 2009 there should be
• No HST refunds in your revenues
• No HST paid in your expenses
• Correct past errors as best you can with
  reversing entries.
• Dr. HST Revenue
• Cr. HST Paid - Expenses

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TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE TOWN OF ANYWHERE
CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2009 Year Ended December 31, 2009 Year Ended December 31, 2009 Year Ended December 31, 2009 Year Ended December 31, 2009 Year Ended December 31, 2009 Year Ended December 31, 2009          
2009 2009 2008
REVENUE Budget Actual Actual
Taxation Taxation Taxation Taxation Taxation Taxation 540,000 543,000 595,000
Grants in lieu of taxation Grants in lieu of taxation Grants in lieu of taxation Grants in lieu of taxation Grants in lieu of taxation Grants in lieu of taxation Grants in lieu of taxation 40,000 40,000 39,500
User fees User fees User fees User fees User fees User fees User fees 40,000 37,800 34,400
Government Transfers Government Transfers Government Transfers Government Transfers Government Transfers Government Transfers Government Transfers 240,000 241,700 215,000
Permits, licenses and fines Permits, licenses and fines Permits, licenses and fines Permits, licenses and fines Permits, licenses and fines Permits, licenses and fines Permits, licenses and fines 20,000 17,700 15,000
Investment income Investment income Investment income Investment income Investment income Investment income Investment income 20,000 21,800 26,000
Other income Other income Other income Other income Other income Other income Other income 8,000 7,820 8,100
Total revenue Total revenue Total revenue Total revenue Total revenue Total revenue 908,000 909,820 933,000
EXPENSES EXPENSES EXPENSES EXPENSES EXPENSES EXPENSES
General government services General government services General government services General government services General government services General government services General government services 170,000 170,500 165,000
Protective services Protective services Protective services Protective services Protective services Protective services Protective services 20,000 20,000 19,000
Transportation services Transportation services Transportation services Transportation services Transportation services Transportation services Transportation services 220,000 215,000 232,500
Environmental health services Environmental health services Environmental health services Environmental health services Environmental health services Environmental health services Environmental health services 23,000 20,000 25,000
Public health and welfare services Public health and welfare services Public health and welfare services Public health and welfare services Public health and welfare services Public health and welfare services Public health and welfare services 12,000 10,000 12,000
Regional planning and development Regional planning and development Regional planning and development Regional planning and development Regional planning and development Regional planning and development Regional planning and development 36,000 36,700 38,300
Resource conservation Resource conservation Resource conservation Resource conservation Resource conservation Resource conservation Resource conservation 28,000 27,300 22,700
Recreation and cultural services Recreation and cultural services Recreation and cultural services Recreation and cultural services Recreation and cultural services Recreation and cultural services Recreation and cultural services 95,000 96,000 100,800
Total expenses Total expenses Total expenses Total expenses Total expenses Total expenses Total expenses 604,000 595,500 615,300
ANNUAL SURPLUS ANNUAL SURPLUS ANNUAL SURPLUS ANNUAL SURPLUS ANNUAL SURPLUS ANNUAL SURPLUS ANNUAL SURPLUS 304,000 314,320 317,700
ACCUMULATED SURPLUS, beg of year ACCUMULATED SURPLUS, beg of year ACCUMULATED SURPLUS, beg of year ACCUMULATED SURPLUS, beg of year ACCUMULATED SURPLUS, beg of year ACCUMULATED SURPLUS, beg of year ACCUMULATED SURPLUS, beg of year 1,307,280 1,307,280 989,580
ACCUMULATED SURPLUS, end of year ACCUMULATED SURPLUS, end of year ACCUMULATED SURPLUS, end of year ACCUMULATED SURPLUS, end of year ACCUMULATED SURPLUS, end of year ACCUMULATED SURPLUS, end of year ACCUMULATED SURPLUS, end of year 1,611,280 1,621,600 1,307,280
74
Statement of Change in Net Financial Assets ( Net
Debt)

• Reports the extent to which revenues were
  sufficient
• to cover cash expenditures. It
• reconciles opening net debt balance to closing
  net debt balance, and
• highlights changes in TCA balance caused by
• Acquisitions,
• amortization expense and/or
• disposals write downs.

75
Statement of Change in Net Debt cont
The Statement of Change in Net Debt the
Statement of Cash Flows are derivative
statements. MEANING? They cant be completed
until you have first completed your Statement of
Financial Position and your Statement of
Operations! WHY?
76
Statement of Change in Net Debt cont

• The reason the Statement of Change in Net Debt is
  
• considered a derivative statement is because
  before you can
• prepare it you need
• Annual surplus/deficit for the year Statement
  of Operations (Income Statement)
• Changes in your non-financial assets Statement
  of Financial Position (Balance
  Sheet)

77
Statement of Change in Net Debt
Annual Surplus (Deficit)
Changes in Non Financial Assets (Acquisition of TCA) Proceeds on disposals (Gains) losses on disposal of TCA Write-down of TCA Amortization Decrease (increases) in inventories Decreases (increases) in prepaids
Changes in Net Debt Net Debt, Beginning of Year
Net Debt, End of Year
78
Statement of Cash Flow
The Statement of Cash Flow reconciles your
opening cash balance to your cash balance at the
end of the year! It reports the sources and uses
of cash by

• Operations
• Capital transactions (acquisitions disposals)
• Investments (purchases disposals)
• Financing (debt proceeds payments)

79
Statement of Cash Flow continued

• The first step in preparing a Statement of Cash
  Flows is to distinguish between sources and uses
  of cash.
• Decreases in non-cash assets are sources of
  cash, while
• increases are uses of cash.
• Liabilities are completely the opposite so
  increases in liabilities
• are sources of cash while decreases in
  liabilities are uses of
• cash.
• Some examples

80
Statement of Cash Flow continued

• Annual Surplus - Source of Cash
• Annual Deficit - Use of Cash
• Acquisition of TCA - Use of Cash
• Disposal of TCA - Source of Cash (proceeds)
• Issue Loan - Use of Cash
• Sale of Property - Source of Cash
• Repay Bank Loan - Use of Cash
• Issue Debenture - Source of Cash

81
Statement of Cash Flow continued
Cash Provided by Operating Transactions Surplus (Deficit) Changes in Non-Cash Items
Cash Provided by Capital Transactions Proceeds on sale of TCAs or cash used to acquire TCAs. Cash Provided by Investing Transactions Portfolio investments or real estate held for resale Cash Provided by Financing Transactions Proceeds of long-term debt and debt repayments
Increase (Decrease) in Cash Cash, Beginning of Year
Cash, End of Year
82
Financial Statement Note Disclosures

• Needed to provide users with sufficient
  information about transactions balances.
• PSAB Statements will require enhanced note
  disclosure.
• However, a Municipality is not required to
  include notes that are not applicable or
  immaterial.

83
Financial Statement Notes

• Note 1 - Status of the organization
• A short description of the Municipality and its
  relevant legislation.
• Sample
• 1. Status of the Town of Anywhere
• The incorporated Town of Anywhere is a municipal
  government
• that was incorporated in 1986 pursuant to the
  Province of
• Newfoundland and Labradors Municipalities Act.
  The Town
• provides or funds municipal services such as
  fire, public works,
• parks and recreation, tourism, and other general
  government
• operations.

84
Financial Statement Notes continued

• Note 2 Significant Accounting Policies
• Disclosure of significant accounting policies
  should be included every year.
• Sample
• 2. Significant Accounting Policies
• The consolidated financial statements have been
  prepared in
• accordance with Canadian generally accepted
  accounting
• principles as recommended by the Public Sector
  Accounting
• Board (PSAB) of the Canadian Institute of
  Chartered
• Accountants and reflect the following significant
  accounting
• policies

85
Financial Statement Notes continued

• Note 2 Continued.
• 2 a. Basis of Consolidation
• Discloses the entitles included in the Municipal
  Reporting Entity.
• Sample
• a) Basis of Consolidation
• The consolidated financial statements include
  the assets, liabilities, revenues and expenses
  of the reporting entity. The reporting entity
  is comprised of all organizations, local boards
  and committees of the council which are
  controlled by the Municipality which include the
  following
• Community Development Corporation
• Anywhere Public Library
• Anywhere Memorial Stadium

86
Financial Statement Notes Continued

• Note 2 Continued.
• 2 b. Significant accounting policies on assets
  and liabilities
• Details on the accounting policies for only
  those with balances in the Statements.
• Sample
• b) Cash and Temporary Investments
• Cash and temporary investments include cash
  and short term investments with maturities of
  three months or less from the date of
  acquisition.

87
Financial Statement Notes continued.

• Note 2 Continued.
• c) Investments
• Sample
• Temporary investments are accounted for at the
  lower of cost and market. Other investments are
  recorded at cost.
• d) Inventories
• Sample
• Inventories are valued at the lower of cost and
  replacement cost.

88
Financial Statement Notes continued.

• Note 2 Continued.
• e) Tangible Capital Assets
• Sample
• Tangible capital assets are recorded at cost
  which includes all amounts that are directly
  attributable to the acquisition, construction,
  development or betterment of the asset. Assets
  under construction are not amortized until the
  asset is put into use and one-half of the annual
  amortization is charged in the year of
  acquisition and in the year of disposal. The
  cost, less residual value, of the tangible
  capital assets are amortized on a straight line
  basis over their estimated useful lives as
  follows
• Buildings
  25 years
• Computer hardware and software
  5 years
• Equipment
  5 years
• Roads
  20 years
• Vehicles
  10 years
• Water and Sewer
  60 years

89
Financial Statement Notes continued.

• Note 2 Continued.
• f) Revenue Recognition
• Sample
• Revenues are recognized as earned and when
  collection is reasonably assured. Tax rates are
  approved annually by Council.
• g) Use of estimates
• Sample
• The preparation of financial statements in
  conformity with Canadian generally accepted
  accounting principles for the public sector
  requires management to make estimates and
  assumptions that affect the reported amounts of
  assets and liabilities and disclosures of
  contingent assets and liabilities at the date of
  the financial statements and the reported amounts
  of revenue and expenses during the reporting
  period. Actual results could differ from these
  estimates.

90
Financial Statement Notes continued.

• Note 3 - Cash Temporary Investments
• Disclose the nature and terms of temporary
  investments together with any valuation
  allowances. Sample

3. Cash and Temporary Investments Cash and
temporary investments are comprised of the
following 2009 2008 Cash
XXX XXX Temporary investments
XXX XXX
XXXX XXXX Temporary investments are
comprised mainly of guaranteed investment
certificates and term deposits and have a market
value approximating cost. The Municipality has
designated XXX (2008 XXX) to reserves for debt
principal repayments and tangible capital asset
acquisitions.
91
Financial Statement Notes continued.

• Note 4 Amounts Receivable
• Disclose the nature and terms of a government's
  financial assets net of any doubtful allowance
  amounts. Sample
• 4. Amounts Receivable
• 2009 2008
• Poll tax XXX
  XXX
• Business tax XX
  XX
• Water and sewer XX
  XX
• HST Rebate XX
  XX
• Other XX
  XX
• XXX XXX
• Less allowances for
• doubtful amounts ( XX)
  ( XX)
• XXX XXX

92
Financial Statement Notes continued.

• Note 5 Portfolio Investments
• Disclose amount that is designated for reserves,
  the market values if available and the amount of
  investment income.
• Sample
• 5. Portfolio Investments
  2009 2008
• Marketable securities
• Government of Canada
  XXX XXX Province of
  Newfoundland Labrador XX
  XX
• Other investments X
  X
• 
  X X

93
Financial Statement Notes continued.

• Note 6 Inventories
• Disclose inventories for sale (FA) inventories
  of supply separately (NFA). Sample
• 6. Inventories
• Inventories for use
• 2009 2008
• Chemicals XXX XXX
• Culverts XX XX
• Gravel XX -
• XXX XXX

94
Financial Statement Notes continued.

• Note 7 Accounts Payable Accrued Liabilities
• Disclose between types accounts payable, accrued
  liabilities, etc. but dont include excessive
  detail.
• Sample
• 7. Accounts Payable and Accrued Liabilities
• 2009 2008
• Accounts payable XXX
  XXX
• Accrued expenses XX
  XX
• Other governments XX XX
• XXX XXX

95
Financial Statement Notes continued.

• Note 8 - Long Term Debt
• Should disclose
• Interest rates
• Payments
• Maturity dates
• Principal payments over the next 5 years

Sample 8. Long Term Debt 2009
2008 Newfoundland Municipal
Financing Corporation loan with interest at
12, payable in monthly installments and
maturing December 2012. XXX
XXX Royal Bank term loan with interest at
8, repayable in monthly installments and
maturing October 2016.
XX
XX
96
Financial Statement Notes continued.

• Sample continued.
• 8. Long Term Debt 2009 2008
• Royal Bank term loan with interest at 7,
• repayable in monthly installments and
  maturing
• October 2015. XX XX
• XXX XXX

• Principal payments required in each of the next
  five years are as follows
• 
  XXXX
• 
  XXXX
• 
  XXXX
• 
  XXXX
• 
  XXXX

97
Financial Statement Notes continued.

• Note 9 Commitments
• Disclose obligations that will become liabilities
  in the future.
• Note 10 Contingencies
• Disclose existing conditions that may become a
  liability in the future or those that are not
  accrued because a reasonable estimate of costs
  could not be made. Examples would be lawsuits or
  remediation for a contaminated sites.

98
Financial Statement Notes continued.

• Note 11 Financial Instruments
• A financial instrument is any contract that gives
  rise to a financial asset for one party and a
  financial liability for another party i.e. a
  loan. An example of a generic note adequate for
  most situations
• 11. Financial Instruments
• The Town as part of its operations
  carries a number of financial instruments. It is
  managements opinion the Town is not exposed to
  significant interest, currency or credit risk
  arising from these financial instruments, except
  as otherwise disclosed. Unless otherwise noted,
  the fair value of these financial instruments
  approximates their carrying values.

99
Financial Statement Notes continued.

• Note 12 Subsequent Event
• Is an event that occurs sometime between the
  financial statement date and the date the
  financial statements are completed. There are
  basically two types
• Conditions existed at the year end date but only
  became evident before the completion of the
  financial statements - should adjust Statements
  for!
• Examples
• Bad debt
• Loan guarantee in default

100
Financial Statement Notes continued.

• Note 12 Subsequent Events continued
• Conditions which arose after the year end date -
  Disclose in notes! Examples
• Damage by fire or flood
• Decline in market value of investments
• Issuance of new debt
• Sample of each type

101
Financial Statement Notes continued.

• Note 12 Subsequent Events continued
• 12. Subsequent Events
• (This is an example of the first type of
  subsequent event. Since it has already been
  accrued in the financial statements it would be
  unnecessary to disclose the subsequent event in
  the notes.)
• Subsequent to the year end a major local
  business in the Town filed for bankruptcy. At
  the financial statement date the business owned
  10,000 in taxes and 5,000 for water and sewer
  to the Town. Council believes that the
  collection of these amounts is doubtful and has
  therefore included these balances in the
  allowance for doubtful accounts at December 31,
  2009.
• (This is an example of the second type of
  subsequent event. These types of subsequent
  events should be disclosed in the notes to the
  financial statements)
• Subsequent to the year end council has approved
  and entered into an agreement to purchase a new
  fire truck in the amount of 75,000. The
  purchase of the fire truck is to be financed
  through the general reserve.

102
Financial Statement Notes continued.

• Note 13 Budget
• Remember
• Your Budget is not PSAB compliant
• Difference will result due to the Budget
  Disconnect
• Your budget is prepared on a non-consolidated
  basis (controlled organizations and government
  partnerships are not included).
• Municipalities will have to PSAB their budgets
• Reconciliation b/t budget the PSAB budget will
  be disclosed in a Schedule.

103
Financial Statement Notes continued.

• Note 13 Budget sample
• 13. Budget
• In accordance with the Municipalities Act (1999)
  every council must adopt a financial plan for
  each fiscal period in a form approved by the
  minister. The financial plan is prepared on a
  revenue and expenditure basis that does not meet
  the recommendations of PSAB. For comparative
  purposes, the Town has modified its financial
  plan to prepare a budget that is consistent with
  the scope and accounting principles used to
  report the actual results. The budget figures
  used in these financial statements have been
  approved by Council. The reconciliation between
  the financial plan and the budget figures used in
  these statements is disclosed in Schedule 8
  Reconciliation of the Financial Plan to the
  Budget.

104
Financial Statement Notes continued

• The final note relates to Accounting Changes!
• Basically four types of accounting changes
• A change in presentation
• A change in how accounts have been grouped for
  financial statement purposes. These changes
  impair comparability between years if both years
  are not changed.
• A change in Accounting Policy,
• Can occur for two reasons
• To conform to new PSAB recommendations (or adopt
  PSAB)
• Change fro